Are Affine Volatility Restrictions Still Costly when the Pricing Kernel is Quadratic?
33 Pages Posted: 14 Aug 2019
Date Written: July 14, 2018
I compare the quadratic kernel used by Christoffersen, Heston and Jacobs (2013) with the commonly used Rubinstein's (1976) power pricing kernel in terms of option valuation performance. I do so in both affine and nonaffine GARCH(1,1) models. I find that, in both cases, the quadratic kernel outperforms its linear counterpart. I find no evidence that the performance gap between the affine and the nonaffine models shrinks with the quadratic kernel.
Keywords: GARCH, pricing kernel, stochastic volatility
JEL Classification: G12
Suggested Citation: Suggested Citation
Aoun, Patrick, Are Affine Volatility Restrictions Still Costly when the Pricing Kernel is Quadratic? (July 14, 2018). Available at SSRN: https://ssrn.com/abstract=3435824 or http://dx.doi.org/10.2139/ssrn.3435824
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